Terms
Ranked from LEAST RISK to MOST RISK for the Seller.
When establishing international terms of payment it is a good idea to
consult your banker.

Method

Usual
Time of Payment

Goods
Available To Buyer

Risk
to Seller

Risk
to Buyer

Comments

CASH
IN ADVANCE

Before
shipment

After
payment

None

Complete
- relies on seller to ship exactly the goods expected, as quoted and
ordered

Seller's
goods must be special in one way or another, or special circumstances
prevail over normal trade practices (example, goods manufactured to
buyer-only specification).

CASH
AGAINST DOCUMENTS

After
shipment

After
payment

If
payment not honoured, goods must be returned or resold. Storage,
handling, return freight expenses may be incurred

Assures
shipment but not content, unless inspection or check-in is allowed
before payment

Security
to the seller is assured if the transfer of funds is confirmed prior to
buyer taking possession of the goods.

LETTER
OF CREDIT (See next two items.)

Commercial
Invoice must match the Letter of Credit exactly. Dates must be
carefully headed - "Stale" documents are unacceptable for collection.

Letters
of Credit require total accuracy in conforming to terms, conditions,
and documentation.

Confirmed
Irrevocable Credit

After
shipment is made, documents presented to the Bank

After
payment

Gives
the seller a double assurance of payments - Depends on the terms of the
letter of credit.

Assures
shipment is made but relies on exporter to ship goods as described in
documents. Terms may be negotiated prior to letter of credit agreement,
alleviating buyer's degree of risk.

The
inclusion of a second assurance of payment (usually a "reputable" Bank)
prevents surprises, adds assurance that issuing bank has been deemed
acceptable by confirming bank. Adds cost and an additional requirement
to seller.

Unconfirmed
Irrevocable Credit

Same
as above

Same
as above

Seller
has single bank assurance of payment and seller remains dependent on
foreign bank. Seller should contact his banker to determine whether or
not the issuing bank has sufficient assets to cover the amount.

Same
as above

Credit
can be changed only by mutual agreement, as stipulated in a sales
agreement. Becomes open account with buyer's bank as collection agent.
Foreign bank may have problems making payment in sum or timeliness.

DRAFTS/
BILLS OF EXCHANGE (See next two items.)

Remittance
time from buyer's bank to seller's bank may still take one week to one
month

Drafts,
by design, should contain terms and conditions mutually agreed upon

A
draft may be written with virtually any term or condition agreeable to
both parties. When determining draft tenor (terms and conditions)
consult with your banker and freight forwarder to determine the most
desirable means of doing business in a given country.

Sight
Draft (with documents against acceptance)

On
presentation of draft to buyer.

After
payment to buyer's bank.

If
draft not honoured, goods must be returned or resold. Storage,
handling, return freight expenses may be incurred.

Assures
shipment but not content, unless inspection or check-in is allowed
before payment.

A
draft can be a collection instrument used to exchange possession and
title to goods for payment. Seller is essentially drawing a check
against the bank account of the buyer. Buyer's bank must have
pre-approval, or seek approval of the buyer prior to honouring the
check. Payable upon presentation of documents.

Time
Drafts (with documents against acceptance)

On
maturity of the draft

Before
payment, after acceptance

Relies
on buyer to honour draft upon presentation.

Assures
shipment but not content, time of maturity allows for adjustments, if
agreed to by seller.

Payable
based upon the acceptance of an obligation to pay the seller at a
specified time. Although a time draft has more collection leverage than
an invoice, it remains only a promissory note, with conditions.

OPEN
ACCOUNT

As
agreed, usually by invoice

Before
payment

Relies
completely on buyer to pay account as agreed

None

All
terms of payment, including extra charges and terms should be mutually
understood and agreed upon prior to open account initiation. Companies
conducting on-going business are candidates for open account terms of
payment. Seller must measure not only buyer's credit reliability but
the country's as well.

Receiving
payment by cash in advance of the shipment might seem ideal.
In this situation, the exporter is relieved of collection problems and
has immediate use of the money. A wire transfer is commonly used and
has the advantage of being almost immediate. Payment by check, may
result in a collection delay of up to six weeks. Therefore, this method
may defeat the original intention of receiving payment before shipment.

Many
exporters accept credit cards in payment for exports of consumer and
other products, generally of a low follar value, sold directly to the
end user. Domestic and international rules governing credit card
transactions sometimes differ, so U.S. merchants should contact their
credit card processor for more specific information. International
credit card transactions are typically done by telephone or fax. Due to
the nature of these methods, exporters should be aware of fraud.
Merchants should determine the validity of transactions and obtain the
proper authorizations.

For
the buyer, however, advance payment tends to create cash flow problems,
as well as increase risks. Furthermore, cash in advance is not as
common in most of the world as it is in the United States. Buyers are
often concerned that the goods may not be sent if payment is made in
advance. Exporters that insist on this method of payment as their sole
method of doing business may find themselves losing out to competitors
who offer more flexible payment terms.

T/T
payment in advance is usually used when the sample and small quantity
shipments are transported by air. The reason why is that the documents
like air waybill, commercial invoice and packing list will be sent to
you along with the shipment by the same plane. As soon as the shipment
arrives, you can clear the customs and pick up the goods with the
documents. As it's acknowledged, T/T payment in advance presents risk
to the importer if the supplier is not an honest one.

It
takes 3-4 days for us to received the wire transfer made from anywhere
in the world.

In
a foreign transaction, an open account can be a convenient method of
payment if the buyer is well established, has a long and favorable
payment record, or has been thoroughly checked for creditworthiness.
With an open account, the exporter simply bills the customer, who is
expected to pay under agreed terms at a future date. Some of the
largest firms abroad make purchases only on open account.

However,
there are risks to open account sales. The absence of documents and
banking channels might make it difficult to pursue the legal
enforcement of claims. The exporter might also have to pursue
collection abroad, which can be difficult and costly. Another problem
is that receivables may be harder to finance, since drafts or other
evidence of indebtedness are unavailable. There are several ways to
reduce credit risk,through such means as export credit insurance and
factoring.

Exporters
contemplating a sale on open account terms should thoroughly examine
the political, economic, and commercial risks. They should also consult
with their bankers if financing will be needed for the transaction
before issuing a pro forma invoice to a buyer.

The
exporter (we) makes shipment and sends the shipping documents to the
exporter's bank (the Bank of China) for collection. The Bank of China
then sends the shipping documents along with a collection letter to the
importer's bank, who then sends a collection notice to the importer.
The importer makes payment upon receiving the notice, and only after
payment does the importer receive the original shipping documents with
which you take the physical possession of the goods.

The
major advantage of the use of a cash against documents payment is the
low cost, versus using a letter of credit. But, this is offset by the
risk that the importer will for some reason reject the documents (or
they will not be in order). Since the cargo would already be loaded (to
generate the documents), we have little recourse against the importer
in cases of non-payment. So, a payment against documents arrangement
involves a high level of trust between the exporter and the importer.

The
D/A transaction utilizes a term or time draft. In this case, the
documents required to take possession of the goods are released by the
clearing bank only after the buyer accepts a time draft drawn upon him.
In essence, this is a deferred payment or credit arrangement. The
buyer’s assent is referred to as a trade acceptance.

D/A
terms are usually after sight, for instance “at 90 days sight”, or
after a specific date, such as “at 150 days bill of lading date.”

As with open account terms, there are some inherent risks in selling on D/A:
- As with a D/P, the importer can refuse to accept the goods for any reason, even if they are in good condition.
- The buyer can default on the payment of a trade acceptance. Unless it
has been guaranteed by the clearing bank, the seller will need to
institute collection procedures and/or legal action.

Documentary
letters of credit or documentary drafts are often used to
protect the interests of both buyer and seller. These two methods
require that payment be made based on the presentation of documents
conveying the title and that specific steps have been taken. Letters of
credit and drafts can be paid immediately or at a later date. Drafts
that are paid upon presentation are called sight drafts. Drafts that
are to be paid at a later date, often after the buyer receives the
goods, are called time drafts or date drafts.

Since
payment by these two methods is made on the basis of documents, all
terms of payment should be clearly specified in order to avoid
confusion and delay. For example, "net 30 days" should be specified as
"30 days from acceptance." Likewise, the currency of payment should be
specified as "US$30,000." International bankers can offer other
suggestions.

Banks
charge fees - based mainly on a percentage of the amount of payment -
for handling letters of credit and smaller amounts for handling drafts.
If fees charged by both the foreign and U.S. banks are to be applied to
the buyer's account, this should be explicitly stated in all quotations
and in the letter of credit.

The
exporter usually expects the buyer to pay the charges for the letter of
credit, but some buyers may not agree to this added cost. In such
cases, the exporter must either absorb the costs of the letter of
credit or risk losing that potential sale. Letters of credit for
smaller amounts can be somewhat expensive since fees can be high
relative to the sale.

Documentary
collections
are regulated by the Uniform Rules for Collections issued by the
International Chamber of Commerce (URC 522). This document can also be
obtained from the International Trade Department of your financial
institution or from ICC Australia*.

Documentary
Collection or Draft is the term when you ship the goods before the
payment is made and then draw a draft on the buyer, not on the bank,
like under L/C. Under documentary collections banks have no
responsibility for the payment.

There
are two types of documentary collections - sight draft, also know as
"Documents Against Payment", and time draft, also known as "Documents
Against Acceptance".

Sight Draft

"Sight
draft" is payable by the buyer immediately after notification by
the buyer's bank of the receipt of the draft and transport documents.

Under
this method of payment you (the Drawer) negotiate the terms with the
buyer (the Drawee), specify the documents required for the payment,
ship the goods and draw the draft on the buyer. The draft and the
documents required for the payment are presented to your bank
(Remitting Bank) and after examination are forwarded to the buyer's
bank (Presenting Bank). The Presenting Bank holds the title documents
(usually the transport documents) and will release them to the buyer
only after the payment was made.

Sight
draft procedure is shown in the diagram below:

1. The Drawer and the
Drawee negotiate terms and conditions of the transaction2. The Drawer ships the
goods3. The Drawer draws a draft
and presents it to the Remitting Bank along with other documents4. The
Remitting Bank
examines the documents and the draft and forwards them to the
Presenting Bank5. The Presenting Bank
notifies the Drawee of receipt of the documents6. The Presenting Bank
holds the documents until the payment is made by the Drawee7. The Drawee examines the
documents and makes the payment for the supplied goods8. The Presenting Bank
releases the documents to the Drawee

Sight
drafts have some similarity with L/C. You deal with documents and
through banks, and the buyer cannot take the possession of the goods
before the payment is occurred.

However,
the payment is not guaranteed. If the buyer for any reason refuses to
pay, you have to deal with goods "on the water" or stacked in the
customs zone in a foreign country. It can be very costly to ship your
goods back or to sell them urgently. In both cases, there are
substantial additional expenses (warehousing, cost of transportation to
a new destination, significant discount, etc.). In some cases, the
buyer who failed to pay was one of the bidders at the resulting auction
and had bought the goods for a fraction of the initial price.

It
is also possible, that the buyer will delay the payment. Although
legally the payment has to be made immediately upon receipt of the
draft by the buyer's bank, the buyer may hold the payment until the
goods are delivered.

Time Draft

Unlike
the sight draft, when dealing with time drafts, the buyer may
take possession of the goods before the payment. Under the time draft,
you agree on a deferring period, ship the goods and draw a draft. For
the title documents to be released, the buyer has to accept the draft
by issuing written evidence of his willingness to pay on the agreed
maturity date (usually by signing and dating the draft).

Dealing
with the 'time draft', always draw a draft against the certain date
specified in the other document. (For example, "Payable at 60 days
after invoice date/bill of lading date/the draft date")

The
time draft, in fact, is very similar to "open account" terms
– you have no control over the goods, nor over the payment.
The only difference is that, in addition to the contract of sale, you
have the buyer's written guarantee to make a payment on a certain date.
You have to rely on the buyer. The consequences of the refusal to pay
are the same as the
consequences of the refusal to pay under "open account" (see below).

Drafts
are normally issued in a set of two (First of Exchange and Second of
Exchange) or singly (Sola Bill of Exchange). ) Two drafts are usually
drawn to ensure that at least one draft reaches the Drawee when they
are dispatched separately. When two drafts are issued they may be
numbered "1" and "2" and marked "First of Exchange (Second
Unpaid)" and "Second of Exchange (First Unpaid)".

Documentary collection is cheaper then L/C but the risk involved is
much greater, especially with the time draft. I wouldn't recommend
these terms, unless you are dealing with a well-known trusted buyer or
the transaction is insured.

A
draft, sometimes also called a bill of exchange, is analogous to a
foreign buyer's check. Like checks used in domestic commerce, drafts
carry the risk that they will be dishonored. However, in international
commerce, title does not transfer to the buyer until he pays the draft,
or at least engages a legal undertaking that the draft will be paid
when due.

Sight
Drafts

A
sight draft is used when the exporter wishes to retain title to the
shipment until it reaches its destination and payment is made. Before
the shipment can be released to the buyer, the original ocean bill of
lading (the document that evidences title) must be properly endorsed by
the buyer and surrendered to the carrier. It is important to note that
air waybills of lading, on the other hand, do not need to be presented
in order for the buyer to claim the goods. Hence, risk increases when a
sight draft is being used with an air shipment.

In
actual practice, the ocean bill of lading is endorsed by the exporter
and sent via the exporter's bank to the buyer's bank. It is accompanied
by the sight draft, invoices, and other supporting documents that are
specified by either the buyer or the buyer's country (e.g., packing
lists, consular invoices, insurance certificates). The foreign bank
notifies the buyer when it has received these documents. As soon as the
draft is paid, the foreign bank turns over the bill of lading thereby
enabling the buyer to obtain the shipment.

There
is still some risk when a sight draft is used to control transferring
the title of a shipment. The buyer's ability or willingness to pay
might change from the time the goods are shipped until the time the
drafts are presented for payment; there is no bank promise to pay
standing behind the buyer's obligation. Additionally, the policies of
the importing country could also change. If the buyer cannot or will
not pay for and claim the goods, returning or disposing of the products
becomes the problem of the exporter.

Time
Drafts and Date Drafts

A
time draft is used when the exporter extends credit to the buyer. The
draft states that payment is due by a specific time after the buyer
accepts the time draft and receives the goods (e.g., 30 days after
acceptance). By signing and writing "accepted" on the draft, the buyer
is formally obligated to pay within the stated time. When this is done
the time draft is then called a trade acceptance. It can be kept by the
exporter until maturity or sold to a bank at a discount for immediate
payment.

A
date draft differs slightly from a time draft in that it specifies a
date on which payment is due, rather than a time period after the draft
is accepted. When either a sight draft or time draft is used, a buyer
can delay payment by delaying acceptance of the draft. A date draft can
prevent this delay in payment though it still must be accepted.

When
a bank accepts a draft, it becomes an obligation of the bank and thus,
a negotiable investment known as a banker's acceptance. A banker's
acceptance can also be sold to a bank at a discount for immediate
payment.

A
letter of credit adds a bank's promise to pay the exporter to that of
the foreign buyer provided that the exporter has complied with all the
terms and conditions of the letter of credit. The foreign buyer applies
for issuance of a letter of credit from the buyer's bank to the
exporter's bank and therefore is called the applicant; the exporter is
called the beneficiary.

Payment
under a documentary letter of credit is based on documents, not on the
terms of sale or the physical condition of the goods. The letter of
credit specifies the documents that are required to be presented by the
exporter, such as an ocean bill of lading (original and several
copies), consular invoice, draft, and an insurance policy. The letter
of credit also contains an expiration date. Before payment, the bank
responsible for making payment, verifies that all document conform to
the letter of credit requirements. If not, the discrepancy must be
resolved before payment can be made and before the expiration date.

A
letter of credit issued by a foreign bank is sometimes confirmed by a
U.S. bank. This confirmation means that the U.S. bank (the confirming
bank), adds its promise to pay to that of the foreign bank (the issuing
bank). If a letters of credit is not confirmed, it is advised through a
U.S. bank and thus called an advised letter of credit. U.S. exporters
may wish to confirm letters of credit issued by foreign banks if they
are unfamiliar with the foreign banks or concerned about the political
or economic risk associated with the country in which the bank is
located. An Export Assistance Center or international banker can assist
exporters in evaluating the risks to determine what might be
appropriate for specific export transactions.

A
letter of credit may either be irrevocable and thus, unable to be
changed unless both parties agree; or revocable where either party may
unilaterally make changes. A revocable letter of credit is inadvisable
as it carries many risks for the exporter.

A
change made to a letter of credit after it has been issued is called an
amendment. Banks also charge fees for this service. It should be
specified in the amendment if the exporter or the buyer will pay these
charges. Every effort should be made to get the letter of credit right
the first time since these changes can be time-consuming and expensive.

To
expedite the receipt of funds, wire transfers may be used. Exporters
should consult with their international bankers about bank charges for
such services.

A
Typical Letter of Credit Transaction

Here
are the typical steps of an irrevocable letter of credit that has been
confirmed by a U.S. bank:

1.
After the exporter and buyer agree on the terms of a sale, the buyer
arranges for its bank to open a letter of credit that specifies the
documents needed for payment. The buyer determines which documents will
be required.

2.
The buyer's bank issues, or opens, its irrevocable letter of credit
includes all instructions to the seller relating to the shipment.

3.
The buyer's bank sends its irrevocable letter of credit to a U.S. bank
and requests confirmation. The exporter may request that a particular
U.S. bank be the confirming bank, or the foreign bank may select a U.S.
correspondent bank.

4.
The U.S. bank prepares a letter of confirmation to forward to the
exporter along with the irrevocable letter of credit.

5.
The exporter reviews carefully all conditions in the letter of credit.
The exporter's freight forwarder is contacted to make sure that the
shipping date can be met. If the exporter cannot comply with one or
more of the conditions, the customer is alerted at once.

6.
The exporter arranges with the freight forwarder to deliver the goods
to the appropriate port or airport.

7.
When the goods are loaded, the freight forwarder completes the
necessary documentation.

8.
The exporter (or the freight forwarder) presents the documents,
evidencing full compliance with the letter of credit terms, to the U.S.
bank.

9.
The bank reviews the documents. If they are in order, the documents are
sent to the buyer's bank for review and then transmitted to the buyer.

10.
The buyer (or the buyer's agent) uses the documents to claim the goods.

11.
A draft, which accompanies the letter of credit, is paid by the buyer's
bank at the time specified or, if a time draft, may be discounted to
the exporter's bank at an earlier date.

Example
of a Confirmed Irrevocable Letter of Credit

The
example of a confirmed irrevocable letter of credit in (see
below)
illustrates the various parts of a typical letter of credit. In this
sample, the letter of credit was forwarded to the exporter, The Walton
Building Supply Company (A), by the confirming bank, Megabank
Corporation (B), as a result of c letter of credit being issued by the
Third Hong Kong Bank, Hong Kong (C), for the account of the importer,
HHB Hong Kong (D). The date of issue was March 8, 1997 (E), and the
exporter must submit the proper documents (e.g., a commercial invoice
in one original and three copies) (F) by June 23, 1997 (G) in order for
a sight draft (H) to be honored.

Tips
on Using a Letter of Credit

When
preparing quotations for prospective customers, exporters should
keep in mind that banks pay only the amount specified in the letter of
credit - even if higher charges for shipping, insurance, or other
factors are incurred and documented.

Upon
receiving a letter of credit, the exporter should carefully compare the
letter's terms with the terms of the exporter's pro forma quotation.
This step is extremely important, since the terms must be precisely met
or the letter of credit may be invalid and the exporter may not be
paid. If meeting the terms of the letter of credit is impossible or if
any of the information is incorrect or even misspelled, the exporter
should contact the customer immediately and ask for an amendment to the
letter of credit.

The
exporter must provide documentation showing that the goods were shipped
by the date specified in the letter of credit or the exporter may not
be paid. Exporters should check with their freight forwarders to make
sure that no unusual conditions may arise that would delay shipment.

Documents
must be presented by the date specified for the letter of credit to be
paid. Exporters should verify with their international bankers that
there will be sufficient time to present the letter of credit for
payment.

Exporters
may request that the letter of credit specify that partial shipments
and transshipment will be allowed. Specifying what will be allowed can
prevents unforeseen last minute problems.

An
irrevocable Letter of Credit is also an often used payment method. It
is often referred to an L/C. Letters of Credit are formal payment
methods that offer a lot of protection to the parties.

Simply
put, a letter of credit is a letter written by the importer's bank to
the exporter. It verifies that the payment will be guaranteed when the
bank is presented with the concrete documents (bill of lading, and
freight documents). Most letters of credit are "irrevocable" once the
importer has had them sent.

A
letter of credit usually includes applicant (you, the importer),
beneficiary (our I/E agent), opening bank, negotiating bank,
specification and quantity of the goods, amount of money, loading port
and destination port, shipment date, the validity date of the L/C,
terms and conditions agreed by both the importer and seller, and the
documents required by the importers (bill of lading, commercial
invoice, packing list, insurance certificate, etc.)

The
L/C payment procedure is usually as follows:

a.
You (the importer) applies to open the L/C to us (the seller) through a
bank who can open the L/C in your country. b.
The opening bank will inform The Bank of China that the L/C has been
opened. c.
The Bank of China will inform us that the L/C has been established. d.
We'll check all the terms and conditions listed in the L/C. If all
terms and conditions are acceptable, we'll arrange the shipment within
the time specified in the L/C. e.
After the goods are loaded onto the ship without any damage, the
captain will issue the clean bill of lading to us. f.
We will submit the clean bill of lading and other relevant documents
to The Bank of China to gather the payment. Only with clean bill of
lading can you claim the ownership of the goods.g.
The Bank of China will send the clean bill of lading and relevant
documents to your bank (the opening bank). h.
The opening bank will inform you that all documents are received. i.
You will go to the bank to make the payment to get the clean bill of
lading and relevan documents. j.
With all of these documents, you can clear the import Customs and
pick up the goods after the goods arrive on the destination sea port.

L/C
is the most used payment term in International Trade and I'll be fairly
specific on this topic. L/C is a perfect procedure to equally protect
your interests and your buyer's interests. Using L/C as a term of
payment, you risk almost nothing and at the same time it
ensures the buyer that goods are shipped before the payment has
occurred. However, you only will be paid if all terms stipulated in the
L/C are met and all documents specified in the L/C strictly comply with
agreed conditions and are presented in time.

Before
choosing L/C as a term of trade, you must understand what it is, how it
works and what you can do to minimise risks involved in the L/C payment
process.

L/C,
its Forms and Types

Letters
of Credit are regulated by International Chamber of Commerce under the
Uniform Customs and Practice for Documentary Credits (UCP 500). I
strongly recommend you obtain this document from the International
Trade Department of your financial institution or from ICC Australia*
and read it very carefully. Sometimes it's difficult to understand what
it means, as the document is drafted for the banking professionals and
its language is very technical. Do not hesitate to call your bank and
ask questions. Any mistakes, unclear or incorrectly stipulated terms,
even typos in a L/C may cost you dearly.

In
"plain English", L/C is a conditional bank guarantee of payment for
supplied goods. "Conditional" means that to get paid you have to
present the bank-guarantor with documents, which strictly comply with
the terms and conditions specified in the L/C.

There
are different forms and types of L/C, which you may (or should not) use
in your operations, viz

Revocable and Irrevocable L/C
"A revocable L/C may be amended or cancelled by the Issuing Bank at any
moment and without prior notice to the Beneficiary." (UCP 500, Article
8,a). This is as simple, as that. Never accept this form of L/C in your
export arrangements.

Agree
that the L/C is irrevocable before you go any further in your L/C
negotiations. Although UCP 500 requires that L/C should indicate
whether it is revocable or irrevocable (Article 6, b), it also says "in
the absence of such indication the Credit shall be deemed to be
irrevocable." (Article 6, c)

Confirmed L/C
When you export to a country with economical or political instability
or if you are unfamiliar with the Issuing Bank, you should require that
the L/C be confirmed by a first-class bank. If L/C is confirmed, the
confirming bank is liable for the payment.

Transferable L/C
Transferable L/C is a perfect financial tool for middlemen to secure
their margin without involving any funds. It allows dealing with more
than one beneficiary. When a transferable L/C is issued in your favour,
you can transfer it to your seller and use it as a payment.

L/C
"can be transferred only if it is expressly designated as
"transferable" (UCP 500, Article 48, b). Transferable L/C must
correspond with the original L/C, "with the exception of:
- the amount of the L/C,
- any unit price,
- the expiry date,
- the last date for presentation of documents,
- the period for shipment,
any or all of which may be reduced or curtailed." (UCP 500, Article 48,
h)

L/C payable at sight
"Payable at sight" means that you'll be paid "immediately" (in fact, it
may take up to 7 days) after presentation of the documents stipulated
in the L/C to the Issuing Bank or to the Confirming Bank if it was
confirmed.

L/C payable on the maturity date
If deferred payment was agreed, you'll be paid on the maturity date
indicated in the L/C after presentation of the documents stipulated in
the L/C to the Issuing Bank. Don't forget to specify the date from
which the deferring period starts (e.g. 90 days after date of transport
document).

The
payments under L/C are usually made by the bank upon receipt of the
documents stipulated in the L/C and a bill of exchange issued by you.

The
bill of exchange (the draft) is an unconditional order in writing,
signed and addressed by the drawer (you) to the drawee (the paying
bank), requiring the drawee to pay the drawer a certain sum of money
according to the terms of the L/C.

Under
L/C, always draw the draft on the bank, not on the buyer.

How L/C works
There are at least four participants, when dealing with L/C:
- The buyer – the Applicant
- You - the Beneficiary
- Bank, the payment will come from – the Issuing Bank
- Bank, the payment will go to – the Advising Bank.

The
diagram below shows how participants are involved in the process of
payment under L/C:

1.
The Applicant and the Beneficiary negotiate terms and conditions of the
L/C2.
The Applicant applies to the Issuing Bank to issue the L/C3.
The Issuing Bank issues the L/C and forwards it to the Advising Bank4.
The Advising Bank checks the apparent authenticity of the L/C and
advises the L/C to the Beneficiary5.
The Beneficiary checks if the L/C complies with the commercial
agreements and if all terms and conditions specified in the L/C can be
satisfied and ships the goods6.
The Beneficiary assembles the documents specified in the L/C, checks
the documents for discrepancies with the L/C, draws the draft and
presents the draft and the documents to the Advising Bank7.
The Advising Bank bears the draft and the documents against terms and
conditions of the L/C and forwards them to the Issuing Bank8.
The Issuing Bank checks if the documents comply with the L/C and makes
a payment immediately (if the L/C is available by sight) or on a
certain date (if L/C is available by deferred payment)

Another
party, which may be involved in the L/C procedure, is the Nominated
Bank.

The
Advising Bank
The Advising Bank advises you that a L/C is received and available to
you and informs you about the terms and conditions of the L/C. The
advising bank is not responsible for the payment of the L/C.

The
Advising Bank is not necessarily a bank where you usually banking. Shop
around. Try to find a bank, which has a corresponding bank in your
buyer's country and can offer you a better deal in terms of charges
involved in the payment under L/C.

The Issuing Bank
The Issuing Bank is the key player in the procedure, the one who makes
the payment. Try to negotiate with the buyer which bank will issue the
L/C. Ask the Advising Bank if it has a corresponding bank in the
buyer's country and suggest this bank to the buyer as the issuing bank.

If
the Advising Bank does not have a corresponding bank in the buyer's
country, ask the bank to recommend you a well-known bank with high
credit rating and insist your buyer has the L/C issued by this bank.
The Advising Bank will be able to provide you with the information on
financial status and credibility of the Issuing Bank.

If
the Issuing Bank is not internationally recognised and your banker or
you have any doubts that the Issuing Bank, for any political or
economical reason, may fail to make a payment under the L/C, I would
strongly recommend that the L/C be confirmed by another bank.

The Nominated Bank
The Nominated Bank is the bank, which is authorized by the Issuing Bank
"to pay, to incur a deferred payment undertaking, to accept Draft(s) or
to negotiate." (UCP 500, Article 10, b)

The Issuing Bank may authorise the Nominated Bank to negotiate the
drafts and/or documents. Negotiation means that the nominated Bank
– in this case the Negotiating Bank - gives value to such
draft(s) and/or documents, not just examination of the documents. (UCP
500, Article 10, b)

Confirmation of L/C
The confirmation of the L/C by another bank - the Confirming Bank -
means that if the Issuing Bank refuses to make the payment, the
Confirming Bank is responsible for this payment.

The
best-case scenario is when the Advising Bank confirms the L/C. If the
Advising Bank does not agree to confirm the L/C, ask the bank to
recommend you another bank to be the Confirming Bank.

Keep
in mind that "Branches of a bank in different countries are considered
another bank." (UCP 500, Article 2). That means that Citibank in
Poland, for instance, is an independent financial institution and has
its own financial status and credit rating, which is very different
compared with the rating of Citibank in Australia.

If
you are dealing with a buyer from a country with an unstable political
or economical situation, always ask for the confirmation of the L/C.

There
are additional charges for the confirmation of the L/C, which depend on
the risk involved in dealing with the particular country. The
responsibility to pay for the confirmation is negotiable and usually is
paid by the buyer. However, if it wasn't agreed prior to the issuance
of the L/C, you are the one who will pay for this service.

When
L/C is to be confirmed the payment process is different and is shown in
the following diagram:

1.
The Applicant and the Beneficiary negotiate terms and conditions of the
L/C2.
The Applicant applies to the Issuing Bank to issue the L/C 3.
The Issuing Bank issues the L/C and forwards it to the Advising Bank4.
The Confirming Bank confirms the L/C to the Advising Bank5.
The Advising Bank checks the apparent authenticity of the L/C and
advises the L/C to the Beneficiary6.
The Beneficiary checks if the L/C complies with the commercial
agreements and if all terms and conditions specified in the L/C can be
satisfied and ships the goods7.
The Beneficiary assembles the documents specified the Issuing Bank in
the L/C checks the documents for discrepancies with the L/C and
presents them to the Advising Bank8.
The Advising Bank bears the documents against terms and conditions of
the L/C and forwards them to the Confirming Bank9.
The Confirming Bank checks if the documents comply with the L/C and
makes payment immediately (if the L/C is available by sight) or on a
certain date (if L/C is available by deferred payment)10.
The Issuing Bank reimburses the funds to the Confirming Bank
immediately after the payment

There
is another advantage in using confirmed L/C. Assume that after long
negotiations your potential buyer is ready to strike a deal, which is
very profitable for you. The only condition you are not comfortable
with is the deferred payment of 90 days after the shipping date. You
feel that you may have some problems with cash flow, because you have
to pay for the freight, packaging and so on. Well, with the confirmed
L/C you won't.

A
confirmed L/C may be used not only for securing the payment under the
L/C but also as a security to obtain additional funds from the Advising
Bank. Generally, the Advising Bank can discount the L/C in your favour
as soon as the documents stipulated in the L/C are presented to the
bank and checked. The funds will be considered as a loan, which will be
automatically reimbursed by the Confirming Bank on the maturity date
indicated in the L/C.

Information that an
L/C
must have
Although the buyer applies for L/C, it is essential for you to be
absolutely sure that the L/C was prepared correctly and there is no
legitimate ground for refusal of payment under the L/C.

L/C
must enclose:

-
Full Applicant's name and address
- Full Beneficiary's name and address
- Issuing Bank details
- Advising Bank details
- Form and type of credit (e.g. irrevocable, transferable)
- Issue date
- Expiry date
- The latest date of shipment (usually "no later than")
- Expiry date for presentation of documents
- Amount payable under L/C
- Currency of payment
- Port of loading
- Port of discharge
- Terms of delivery
- Indication of the payment of the freight (Freight Prepaid/Freight
Collect)
- Allowances for partial shipment or transshipment if needed
- Type of payment availability (e.g. at sight, on the maturity date)
- Description of goods (must correspond with the description given in
the invoice)
- List of documents required for the payment
- Accountability for bank charges

Documents that may
be stipulated in
an L/C
You should negotiate which documents are to be included in the L/C
before the L/C is issued. Always try to keep this list as short as
possible. Never agree to include a document that must be signed or
authorised by the buyer's representative or a document that may never
be produced (say, a certificate, which should be issued by a foreign
agency).

I
would like to underline that there is a difference between the
documents you have to present under the L/C and the documents you have
to supply according to the contract. It is not necessary to mention all
documents required by the contract in the L/C.

Most
likely, you will be required to present a commercial invoice, a
transport document and an insurance policy (certificate).

The
list of additional documents depends on the agreement made between you
and the buyer. Usually the buyer will include documents needed for the
customs clearance. The list may include:

The
detailed explanation of the above documents is given in the "Export
Documentation" section of these tutorials.

In
relation to L/C, there are several issues about the documents you
should keep in mind:

-
Specify how many original documents and how many copies are to be
presented.
- The description of goods stipulated in the L/C must correspond with
the description given in the invoice. "Must", in this case, means
"must". If the invoice states "100% Fruit Juice" and the L/C
– "Australian Fruit Juice", it is enough for the bank to
refuse the payment and this decision most likely be supported by the
court.
- L/C may require a "clean" transport document. That means the document
"which bears no clause or notation which expressly declares a defective
condition of the goods and/or the packaging". (UCP 500, Article 32, a)

Delays cause troubles
L/C indicates three dates, which must be met to be paid:

-
the latest date for shipment,
- the expiry date for presentation of documents and
- the expiry date of the L/C

When
negotiating the date of shipment, be sure that you are able to ship the
goods before this date. Always allow extra time for the amendments of
the L/C. If the L/C contains any errors or you cannot fulfill all terms
and conditions stipulated in the L/C do not ship the goods until all
necessary amendments are made. Do not forget to include the amendment
allowing "later shipment".

Try
to obtain all possible documents before the shipment. If the document
can be issued only after the goods are shipped (e.g. transport
documents), be sure that you'll get it before the date stated in the
L/C. If L/C does not indicate the date of presentation of the
documents, "banks will not accept documents presented to them later
than 21 days after the date of shipment". (UCP 500, Article 43, a)

The
expiry date of the L/C should allow you not only to assemble and check
all documents but also to correct errors, which might be identified by
the bank. The bank has up to 7 days to examine the documents and inform
you if there are any discrepancies. These discrepancies must be
corrected and the documents must be resubmitted to the bank prior to
the expiry date. "In any event, documents must be presented not later
than the expiry date of the Credit." (UCP 500, Article 43, a)

Freight Payment
"Freight" is the term, which refers to the transportation charges (UCP
500, Article 33, a). L/C usually requires indicating whether you or the
buyer is liable for the freight payment. The responsibility to pay
freight depends on the agreed terms of delivery.

If
the agreed delivery terms include freight (e.g. CFR, CIF, CIP), then
the L/C will require that the transport document clearly indicate that
freight has been paid or prepaid and the words "Freight Prepared"
appear on the transport document.

"The
words "freight prepayable" or "freight to be prepaid" or words of
similar effect, if appearing on transport documents, will not be
accepted as constituting evidence of the payment of freight" (UCP 500,
Article 33, c)

If
the agreed delivery terms do not include freight (e.g. EXW, FCA, FAS,
FOB), then the L/C will require that the transport document indicate
that freight is to be paid by the buyer and the words "Freight Collect"
appear on the transport document.

Minimising the risks
When dealing with L/C pay careful attention to the following:

- Prior to
the issuance
of the L/C, negotiate exactly what documents must be presented to the
bank.
- Try to agree to present as few documents as possible and to have
descriptions as simple as possible.
- Always include your requirements for the L/C in the pro-forma invoice.
- Once issued, the L/C can only be altered or cancelled by consent of
all parties.
- Remember that L/C is a bank-to-bank agreement and is not a substitute
for the contract between you and the buyer.
- Be sure that you are in a position to provide the bank with all
documents stipulated in the L/C in time.
- Always indicate L/C as "irrevocable".
- Check the Additional Conditions and be sure that you are able to meet
them.
- If you have any doubts that the Issuing Bank, for any political or
economical reason, can fail to make a payment, the L/C must be
confirmed by the Advising Bank or by any other bank, whose confirmation
will be accepted by the Advising Bank.
- If there are any discrepancies and the L/C has to be amended, do not
ship goods before these amendments are made.

International
consignment sales follow the same basic procedures as in the United
States. The goods are shipped to a foreign distributor who sells them
on behalf of the exporter. The exporter retains title to the goods
until they are sold, at which point payment is sent to the exporter.
The exporter has the greatest risk and least control over the goods
with this method. Additionally, receiving payment may take quite a
while.

It
is wise to consider risk insurance with international consignment
sales. The contract should clarify who is responsible for property risk
insurance that will cover the merchandise until it is sold and payment
is received. In addition, it may be necessary to conduct a credit check
on the foreign distributor.

Countertrade

International
countertrade is a trade practice whereby one party accepts goods,
services, or other instruments of trade in partial or whole payment for
its products. This type of trade fulfills financial, marketing, or
public policy objectives of the trading parties. For example, a firm
might trade by bartering because it or its trading partner lacks
foreign exchange.

Many
U.S. exporters consider countertrade a necessary cost of doing business
in markets where U.S. exports would otherwise not be sold. One
consideration for smaller firms is that this type of trade may cause
cash flow problems. Therefore, many smaller exporters do not consider
this an option as they wish to do business in U.S. dollars.

There
are several types of countertrade, including counterpurchase and
barter. Counterpurchase is quite common. In this situation, exporters
agree to purchase a quantity of goods from a country in exchange for
that country's purchase of the exporter's product. These goods are
typically unrelated but have an equivalent value. Another form of this
practice is contractually linked, parallel trade transactions that each
involve a separate financial settlement. For example, a countertrade
contract may provide that the U.S. exporter will be paid in a
convertible currency as long as the U.S. exporter (or another entity
designated by the exporter) agrees to purchase a related quantity of
goods from the importing country.

Barter
arrangements in international commerce are not as common, because the
parties' needs for the goods of the other seldom coincide and because
valuation of the goods may be problematic. This type of countertrade
occurs without money exchanging hands as merchandise is traded directly
for other merchandise or services. Barter might occur by swapping (one
good for another) or by switching (using a chain of buyers and sellers
in different markets to barter).

U.S.
exporters can take advantage of countertrade opportunities by trading
through an intermediary with countertrade expertise, such as an
international broker, an international bank, or an export management
company. One drawback to this type of exporting is that there are often
higher transaction costs and greater risks than with other kinds of
export transactions.

The
Department of Commerce can advise and assist U.S. exporters on
countertrade requirements. The Financial Services and Countertrade
Division of ITA's Office of Finance, monitors countertrade trends,
disseminates information (including lists of potentially beneficial
countertrade opportunities), and provides general assistance to
enterprises seeking barter and countertrade opportunities. For more
information, contact the Financial Services and Countertrade
Division/Office of Finance, International Trade Administration, U.S.
Department of Commerce, Washington, D.C. 20230; telephone 202-482-4471.

A
buyer and a seller who are in different countries rarely use the same
currency. Payment is usually made in either the buyer's or the seller's
currency or in a third mutually agreed-upon currency.

One
of the risks associated with foreign trade is the uncertainty of the
future exchange rates. The relative value between the two currencies
could change between the time the deal is concluded and the time
payment is received. If the exporter is not properly protected, a
devaluation or depreciation of the foreign currency could cause the
exporter to lose money. For example, if the buyer has agreed to pay
500,000 French francs for a shipment and the franc is valued at 20
cents, the seller would expect to receive US$100,000. If the franc
later decreased in value to be worth 19 US cents, payment under the new
rate would be only US$95,000, a loss of US$5,000 for the seller. On the
other hand, if the foreign currency increases in value the exporter
would get a windfall in extra profits. Nonetheless, most exporters are
not interested in speculating on foreign exchange fluctuations and
prefer to avoid risks.

If
the buyer asks to make payment in a foreign currency, the exporter
should consult an international banker before negotiating the sales
contract. Banks can offer advice on the foreign exchange risks that
exist with a particular currency. Some international banks can also
help hedge against such a risk, by agreeing to purchase the foreign
currency at a fixed price in dollars, regardless of the currencies
value at the time the customer pays. Banks will normally charge a fee
or discount the transaction for this service. If this mechanism is
used, the bank's fee should be included in the price quotation.

In
international trade, problems involving bad debts are more easily
avoided than rectified after they occur. Credit checks and the other
methods that have been discussed in this chapter can limit the risks.
Nonetheless, just as in a company's domestic business, exporters
occasionally encounter problems with buyers who default on their
payment. When these problems occur in international trade, obtaining
payment can be both difficult and expensive. Even when the exporter has
insurance to cover commercial credit risks, a default by a buyer still
requires the time, effort, and cost of the exporter to collect a
payment. The exporter must exercise normal business prudence in
exporting and exhaust all reasonable means of obtaining payment before
an insurance claim is honored. Even then there is often a significant
delay before the insurance payment is made.

The
simplest (and least costly) solution to a payment problem is to contact
and negotiate with the customer. With patience, understanding, and
flexibility, an exporter can often resolve conflicts to the
satisfaction of both sides.

This
point is especially true when a simple misunderstanding or technical
problem is to blame and there is no question of bad faith. Even though
the exporter may be required to compromise on certain points - perhaps
even on the price of the committed goods - the company may save a
valuable customer and profit in the long run.

However,
if negotiations fail and the sum involved is large enough to warrant
the effort, a company should obtain the assistance and advice of its
bank, legal counsel, and other qualified experts. Since arbitration is
often faster and less costly, this step is preferable to legal action
if both parties can agree to take their dispute to an arbitration
agency. The International Chamber of Commerce handles the majority of
international arbitration and is usually acceptable to foreign
companies because it is not affiliated with any single country. For
information contact the vice president for arbitration, U.S. Council of
the International Chamber of Commerce, telephone 212-354-4480.

Export
Credit InsuranceThe payments in
International Trade can be insured. The credit insurance enables you to
expand your exports without fear of loss. I suggest that you try to
insure payments under documentary collections, consignment and open
account terms. You may even consider the
insurance
of the unconfirmed L/C.

The
export credit insurance, issued by a financial institution in your
favour, protects you against non-payments by the buyer or by the
Issuing Bank (in case of insuring an unconfirmed L/C) due to commercial
(insolvency, fraud) or political risk. In case of non-payment, you will
usually receive 80-90% of the debt.

The
credit insurance not only guarantees you the payment, but also enables
you to provide better terms to your buyers. Remember the dilemma
between high and low risk payment terms? Well, credit insurance is the
solution for this predicament.

The insured
payment also
allows you to obtain additional funds from a bank. Similar to the
discounting of funds under confirmed L/C, your bank will usually
provide you with trade finance and use your credit insurance as a
security.

Quite often you can
compromise with the buyer by using different terms of payment for one
transaction.

Remember
that I suggested you insist the buyer pay in advance when the goods are
required to be customised? I also mentioned that "cash in advance" is
the least preferred term for the buyer. The solution is mixed payments.
You estimate the cost involved in customisation,
which has to be prepaid and the balance may be payable under different
terms, L/C, for instance.

When
you experience difficulties with cash flow and do not have available
funds to prepay freight and other pre-shipment expenses, you also may
consider mixed payments.

Using
mixed payments, you can avoid losses, which occur when the buyer
refuses the payment under the sight draft.

If
the mixed payments were negotiated, the proportion has to be clearly
indicated in the contract of sale. For example:
"Terms of Payment: 20%
cash with the order 80% by irrevocable Letter of Credit confirmed by first class bank and
payable at sight via the-advising-bank's-name and location in
favour of your-company-name"

1.
U.S. DOLLARS - Enter the
entire amount to be collected; if not in U.S. dollars, specify
currency.

2.
DATE - Enter the date the
Draft is issued.

3.
OF THIS FIRST EXCHANGE (SECOND UNPAID)
- Enter the terms of payment (also called the Tenor of the draft): at
45 Days, at Sight, At 30 days B/L, etc. "Second Unpaid" refers to the
duplicate copy of the draft (OF THIS SECOND EXCHANGE, FIRST UNPAID);
once payment has been made against either copy, the other becomes void.

4.
PAY TO THE ORDER OF - Enter
the name of the party to be paid (Seller, "Payee"); this may be the the
Seller of the Seller's bank, and will be the party to whom the foreign
Buyer's bank will remit payment.

5.
UNITED STATES DOLLARS -
Enter the amount from Field 1 in words; if payment is not to be made in
U.S. Dollars, block out "United States Dollar" and enter correct
currency.

6.
CHARGE TO ACCOUNT OF -
Enter the name and address of the paying party (Buyer, "Drawee"). For
Letter of Credit payments, enter the name and address of the Buyer's
opening bank as well as the L/C number and issue date.

7.
NUMBER - Enter an
identification, or Draft, number, as assigned by the Seller to
reference the transaction.

8.
AUTHORIZED SIGNATURE - The
signature of the authorized individual for the Seller or the seller's
agents ("Drawer").

9.
FORWARD DRAFT TO - Enter
the name and address to whom the Draft is being sent. Unless this is a
letter of credit being negotiated in the U.S., this should be the name
and address of a foreign bank.

10.
FORWARDING DATE - Enter the
date the Draft is being sent to the bank in Field 9.

11.
DRAFT NUMBER - Enter the
Seller's Draft number, as noted in Field 7 above.

12.
PURPOSE OF DRAFT - Check
the applicable box if the draft is part of letter of credit
negotiation, a collection, or an acceptance.

13.
LIST OF DOCUMENTS - Enter
the number and type of each original and duplicate document to be
included with this Transmittal Letter. Any document attached will
eventually be released to the Buyer.

14.
DELIVER ALL DOCUMENTS -
Check either "Deliver all documents in one mailing" or "Deliver
documents in two mailings." Generally, documents are delivered in one
mailing.

15.
DELIVER DOCUMENTS AGAINST -
Ensure that the type of Draft attached (Block 3) is compatible with the
"deliver against" instructions. Sight Drafts should accompany "Deliver
against Payment" instructions, while Time Drafts should accompany
"Deliver against Acceptance" instructions.

16.
BANK CHARGES - The
correspondent bank will not pay unless all charges are collected. Based
on your agreement with the Buyer, indicate which party is responsible
for both the remitting and presenting bank's charges. By checking "all
charges for Account of Drawee," the Buyer is responsible for these
charges; if the Buyer does not pay (or is not to pay) these charges,
and id "Do Not Waive Charges" has not been checked, the Seller will be
billed for expenses incurred.

17.
PROTEST - Check "Protest"
(specify "for nonpayment" or for "non-acceptance," depending on the
type of draft attached - see instruction, Field 15) if you wish the
correspondent bank to process written, notarized documentation in event
that the Buyer refuses to pay or accept the Draft. Additional Bank
expenses associated with a protest are usually charged to the Seller.

18.
PRESENT ON ARRIVAL - Check
if you wish the Draft to be presented on the arrival of the goods to
the Buyer.

19.
ADVISE - Check the
appropriate blocks, and block-out the non-applicable terms, if you wish
to be advised of payment/acceptance or non-payment or
non-payment/non-acceptance.

20.
IN CASE OF NEED - Enter the
representative of the Seller in the country to which the Draft and
documents are going, if one exists; check the block which describes the
representative's authority.

21.
OTHER INSTRUCTIONS - Enter
any instructions to either the remitting or correspondent banks, such
as remittance instructions, clarification of protest procedures,
multiple-draft instructions, etc.

22.
REFER ALL QUESTIONS - Enter
the name of the contact, and his/her address & telephone
number, in the Seller's country; specify if this contact is employed by
the Shipper (Seller) or the Seller's agent (Freight Forwarder).

The
example of a confirmed irrevocable letter of credit in illustrates the
various parts of a typical letter of credit. In this sample, the letter
of credit was forwarded to the exporter, The Walton Building Supply
Company (A), by the confirming bank, Megabank Corporation (B), as a
result of c letter of credit being issued by the Third Hong Kong Bank,
Hong Kong (C), for the account of the importer, HHB Hong Kong (D). The
date of issue was March 8, 1997 (E), and the exporter must submit the
proper documents (e.g., a commercial invoice in one original and three
copies) (F) by June 23, 1997 (G) in order for a sight draft (H) to be
honored.